Border-adjustment tax could wipe out retail earnings by 50% or more, analyst says

Chen: Price sensitivity does matter

The border-adjustment tax issue could affect retail companies' earnings per share by 50 percent or more, retail expert Oliver Chen told CNBC on Friday.

"You also have to consider how these [retail] companies acquire goods," Chen, a Cowen senior analyst, said during an interview on CNBC's "Power Lunch." "I don't think the U.S. consumer is willing to take on these price increases."

The Republican leaders' so-called border-adjustment tax would tax all imports coming into the U.S., but it would exclude exports. The hope is this plan would allow Washington to make corporate tax cuts across the board, while still generating enough tax revenue to reduce the new budget deficits that would be created.

But retail companies could take a hit, in turn. Opponents of the tax proposal say it isn't clear if it would result in a sharp jump in the dollar, which would be crucial to offset the inflationary impact of taxes on foreign goods.

Bryan Gildenberg, chief knowledge officer for Kantar Retail, echoed Chen's comments during the "Power Lunch" interview.

"Fifty percent doesn't sound unreasonable at all," Gildenberg said. Although he said he hasn't done as extensive research as Chen, Gildenberg agrees there are big impacts to be made.

For retailers, price sensitivity does matter, and any small raise in prices could immediately impact volumes, or sales, Chen and Gildenberg discussed during the segment.

Using Amazon as an example of a disruptor in the retail space, Chen explained how big-box stores like Walmart have already been threatened by a "changing shopping pattern," and by consumers who don't physically want to go to stores anymore. "Walmart has been investing billions to lowers its prices," just to get those shoppers in their doors, Chen said.

Now, the proposed border-adjustment tax could bring a whole host of other issues to the table.

"Earnings per share could be completely wiped out," Chen warned.

—CNBC's Patti Domm contributed to this report.

This story has been updated to say "Republican leaders'" border adjustment tax, not the "Trump administration's" tax.